Productivity Growth, Increasing Income Inequality and Social Insurance: The Case of China
27 Pages Posted: 18 Oct 2000
Date Written: May 2000
This paper studies two striking stylized facts about China's reform: that the output growth in the early stage of the reform is mainly due to productivity growth, and that the income inequality is increasing over time. This paper is a preliminary attempt in understanding these two facts in an unifying framework. Roughly speaking, it embeds a static moral hazard problem into the AK model developed in Rebelo (1991). On the positive side, it is found that both economic growth rate and income inequality increases when the extent of social insurance is decreased. With reasonable parameter values, the model here matches the magnitude of productivity growth, economic growth and change in Gini coefficients observed in China. On the normative side, it is found that perfect insurance cannot be hte optimal arrangement. Numerical simulations show that imperfect insurance regime can be superior to the one without. 10% to 25% coverage might be close to the optimal level. It may suggest that there can be some merit for social insurance even with moral hazard.
JEL Classification: O16, O41, O47
Suggested Citation: Suggested Citation